NFOs a good gamble

It has maintained a “buy” call on Magnum Bhd for its pure exposure to the segment with a longer-term potential catalyst of U-Mobile monetisation.

PETALING JAYA: Numbers forecast operators (NFOs), who restarted their operations in mid-June, saw their sales recover to about 80%-85% of pre-movement control order (MCO) levels by the end of August.

UOB Kay Hian Research has maintained its “overweight” outlook on the gaming sector on its sustainable dividend yields of more than 7%.

“NFOs represent a handful of high dividend yielders that also feature relatively secure cash flows, backed by a historically inelastic consumer base.

“The appeal of NFOs’ ability to sustain financial year 2021 (FY21) yields of 6.9%-7.7% would only be enhanced in a protracted period of low-interest-rate environment, ” it said in a report yesterday.

UOB said that the NFO players were trading at “attractive” valuations of nine to 13 times the FY21 forecast price-earnings ratio (PE), which was below the sector’s mean of 14 to 16 times.

It has maintained a “buy” call on Magnum Bhd for its pure exposure to the segment with a longer-term potential catalyst of U-Mobile monetisation.

“Media reports recently highlighted that U-Mobile could be seeking an initial public offering (IPO) as early as end-2020 to raise US$500mil, although we have not assumed such an imminent event.

“The successful monetisation of its 6.3% stake in U-Mobile, which has a book value of RM270mil or 7% of its market capitalisation, could potentially fetch RM400mil, representing 14% of its market cap. “In a hypothetical IPO scenario, Magnum could dish out its U-Mobile shares in dividend in specie to its shareholders, ” UOB said.

The NFO players started their operations in June after three months of temporary closure due to the MCO.

UOB said the NFOs lost a total of 40 draws due to the MCO and have requested authorities for replacement draws.

“We do not rule out the possibility of the government allowing more special draw days that had previously been cut down to eight days from 22 days in the past two budgets, given the government’s need to raise higher tax revenue. “If this materialises, the incremental profits to the NFOs would not be significant.

“Nevertheless, it would validate the NFOs’ existence and importance to government revenues, ” UOB said.

It said that the gaming industry was unlikely to suffer from duty hikes, although modestly higher licensing costs could materialise.

It pointed out that the government was unlikely to impose further gaming duty hikes on NFOs, as this would likely backfire on the government’s need to raise revenue.

Duty hikes would only further concede the NFO industry’s market share to illegal operators.

“While it is conceivable that the government could impose higher fees such as licensing fees, the financial impact would have a pragmatically modest impact on the NFO operators’ bottom lines, ” UOB said.In terms of share prices of the NFO players, the research house expects gradual recovery due to the sector’s defensive nature.

It said investment sentiment for NFO stocks should improve in the interim period, as investor focus may switch from the unfolding of recessionary effects and rise in Covid-19 infections on to fundamentally resilient businesses, which could recover faster when the MCO is lifted.

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